Exchange-traded funds (ETFs) can be an easy “one-click way” to diversify your dividends. Instead of grinding on the viability of any single payout stream, why not build a basket of them?
But be careful – some pooled payouts are all bad and don’t even keep up with the broader market. In a minute, we’ll review ten dividend dogs masquerading around under the perceived “diversification safety” that ETFs provide.
Make no mistake, there’s a recent rush to ETFs. The 2016 U.S. Exchange Traded Funds Study by Greenwich Associates shows that institutional investors, including pension funds, are increasingly pouring their money into ETFs, from 18.9% of all ETF assets in 2015 to 21.2% last year.
And they’re being driven by a number of factors, such as decreasing risk and adding diversity to their portfolios.
Here are ten ETFs paying between 4% and 17% that might look good on paper, but are actually paper tigers.
SPDR S&P International Dividend ETF (DWX)
The SPDR S&P International Dividend ETF (NYSEARCA:DWX) is one of the prime examples of how casting a wide international net can do more harm than good. Double-digit weightings in Australia, the United Kingdom and Canada, and significant weightings in Switzerland and Hong Kong, can cancel each other out when a couple countries falter as others roar. As a result, while DWX yields more than twice the S&P 500, the fund has only outperformed the index once since inception in February 2008, and sports a negative 9% total return versus 114% for the S&P 500 in that time!
Vanguard Global ex-U.S. Real Estate ETF (VNQI)
The Vanguard Global ex-U.S. Real Estate ETF (NASDSAQ:VNQI) is the real estate investment trust (REIT) edition of the exact same problem. The U.S. version of the fund, the Vanguard REIT ETF (NYSEARCA:VNQ), has long been a better overall performer thanks to the infighting of VNQI’s international weights, and it boasts a much more stable yield than the VNQI to boot.
Global X SuperIncome Preferred ETF (SPFF)
The Global X SuperIncome Preferred ETF (NYSEARCA:SPFF) boasts one of the highest yields in the preferred-stock space. Alas, this merely serves to make up for poorer-quality holdings, and as a result, SPFF is doomed to underperform rivals such as the iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) and the VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF) – just as it has since inception in 2012.
Horizons Nasdaq 100 Covered Call ETF (QYLD)
The Horizons Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) executes an extremely simple options strategy in which the fund holds Nasdaq-100 constituents including Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), then sells covered calls against the Nasdaq-100 to generate income. But because it sells options against the index instead of individual stocks, and only uses one-month contracts, QYLD leaves a ton of value on the table, leading to grossly inferior returns to the Nasdaq-100 that its high yield can’t overcome.
Gartman Gold/Yen ETF (GYEN)
The Gartman Gold/Yen ETF (NYSEARCA:GYEN), which creates the effect of buying gold in yen rather than U.S. dollars, isn’t just a high-yield death trap – it’s a perfect example of the shortcomings of basic screeners. A cursory look at sites like Google Finance and ETFdb show that GYEN yields nearly 8%, but every investor should look at the payouts more closely. GYEN yields 8% based on a widely variable annual distribution that includes capital gains. In past years, that “yield” has come out to roughly 4% — on a fund that has underperformed gold itself since inception, no less. Stay away.